The Supreme Court has rejected the restrictive criterion of the TEAC (Central Economic-Administrative
(Central Economic-Administrative Court) regarding the treatment of deductions not applied in previous years...
TEAC criterion. Sometimes there are companies that, either by mistake or due to ignorance, fail to apply in their Corporate Income Tax (IS) a deduction to which they are entitled. In this sense, a few years ago the TEAC established that, in case of forgetting a deduction, the only alternative was to rectify the declaration of the initial year (as long as it was not prescribed) [TEAC 23-03-2022] .
In mid-2022, the Directorate General of Taxes modified the criteria for the recognition of R&D&I deductions in the Corporate Income Tax, by means of binding consultation V1511-22.
As a result of this consultation, it was determined that it was not possible to record in the self-assessment of a subsequent year the deductions that had been generated previously, being necessary to request the rectification of the self-assessment of the IS corresponding to the year in which it had been generated, interrupting the limitation period.
As a consequence of this new criterion, the deductions generated in prescribed years, and not recorded in the corresponding self-assessment, could not be recognized or applied subsequently. Therefore, the taxpayer would lose the tax benefit, despite having carried out R&D&I activities that could generate deductions.
This consultation changed the criterion based on the resolutions of the TEAC of March 23, 2022, which in turn derived from the pronouncement of the Supreme Court (July 22, 2021) regarding the recognition of new tax losses generated in prescribed years, extending this criterion to deductions.
Less time limit. Until the time of this criterion, the Treasury had allowed to correct these errors by rectifying the initial year’s tax return, or by including the deduction in the income tax return of a subsequent year. In this second case, the deduction could be included within the period established by the regulations for computing deductions not applied due to insufficient tax liability (between 15 and 18 years, depending on the deduction).
Therefore, the TEAC greatly reduced the margin of time available to companies to correct these errors.
Supreme Court. The SC has rejected the application of this restrictive criterion in the ruling of October 17, 2023.
The Supreme Court has followed the TEAC’s lead and, in a case involving a deduction for R&D expenses that was not included in the self-assessment of the IS for the year in which the expenses were incurred, has also admitted the possibility of applying the incentive in the returns for the following 18 years (since the right to deduction was generated). Thus, the Supreme Court has clarified that companies do not only have the possibility of rectification to correct these errors.
The SC has therefore stated that, taking into consideration the special characteristics of this deduction (which usually requires the intervention of third party experts who identify those projects susceptible to generate deductions), taxpayers should be allowed to recognize the deductions generated in previous years, whether prescribed or not, in a subsequent self-assessment, as long as they were within their period of application. In conclusion, the SC establishes the criterion previously maintained by the General Directorate of Taxes and followed by the companies as valid.
Thus, after this last ruling of the Supreme Court, all the companies that failed to record deductions generated in previous years will be able to include them in the following self-assessments of the Corporate Income Tax, with the consequent tax savings that this entails.
